Physical copper ETFs could push prices over $10,000 per ton

The iPath Copper ETN (NYSE:JJC) already offers exposure to copper in the form of futures contracts, but physical copper ETFs could play a larger role in copper prices around the world.

If you’ve been reading this blog for any amount of time, you’d know I’m bullish on commodities – especially the ones that aren’t quite as sexy as gold and silver. Commodities like coal, copper and oil are so integral to expanding economies that countries like China are limiting domestic exports and gobbling up supplies to build stockpiles around the world.

Construction requires copper, and even the idea of physical copper ETFs has created something of a microstorm in the metals markets. JPMorgan and BlackRock iShares have started moving forward with their own individual proposals to launch ETFs that would store and warehouse physical copper.

The more money the copper funds control, the more copper the funds would be stuffing in their warehouses. Obviously, that would take copper off the market that could otherwise be used for meaningful construction projects.

“That physical ETF working and being successful – that’s the difference between $8,500 copper and $10,000 copper,” Max Layton, a metals analyst at Macquarie, tells Jack Farchy of the Financial Times.

If the funds grow large enough, investors could see a case of the tail wagging the dog. Would it be the fund driving up copper prices, or rising copper prices driving investors to dump more money into the ETF? It’s a line that hasn’t fully been tested.

There is one copper ETN that already offers exposure to copper in the form of futures contracts. The iPath Dow Jones-UBS Copper Subindex Total Return ETN (NYSE:JJC), though, has a relatively small market cap at $173 million. Still, it’s up 16 percent over the past three months, and if JPMorgan and BlackRock iShares are successful in their bids to create physical copper ETFs, I can see JJC – and the price of copper – continuing its upward climb.